Laurel & Hardy? No Larry & Paul

As I frequently say, I am not the sharpest knife in the drawer.  In fact I reckon I take prided in how little I actually know.  But every now and then I am able to string together a couple a few thoughts and sentences in such a manner to express what I honestly and truly believe and this is one of those rare times. When it comes to economics, I am no economist but when I read what is proposed and written by many of the “so-called’ experts in this field regarding the present economic standing of the United States, in particular Paul Krugman and Larry Summers, I always think of what Milton Friedman once said: “If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.”

I would not be surprised if a lot of cats consider Paul Krugman and Larry Sumner’s as overly smart and learned men. I would agree and note there are several reason for this, inclusive of their Ivy league educations and their incessant habit of speaking in technical terms employed to make them seem smarter than they are and/or to confuse the listener when they are proven wrong and/or are just guessing about what they think versus what they actually know. I suggest this because both believe economic theory is ALWAYS right which herein my problem with them is. Let us start with Krugman, who clearly has no clue or understanding of middle and lower class Americans.

If you have ever heard Paul Krugman talk or read anything he has penned to paper, one halcyon observation that can be made is that in his astigmatic perspective, he is always right and never wrong. No matter the topic, especially when the subject is rooted in macroeconomics, if you disagree or refute his propositions, you are often accused of having bad data, reconstructing history or just being plane ole illogical. This unceasing proclivity of Krugman’s to be correct in theory but incorrect based on real world standards would be amusing if it were not so dangerous. For example Krugman frequently invents or pretends to have been the economist who predicted the housing bubble. What he forgets to add is that in 2002 he wrote that the Federal Reserve and Alan Greenspan needed to “create a housing bubble to replace the NASDAQ bubble” in order to combat the recession at the time. When this was pointed out, you guessed it, he explained away the unexplainawayable.

He also has a habit of taking credit for stuff that has nothing to do with him or his words like the fact that the U.S. has yet to experience any real increase in price inflation. This although he had stated and predicted that from 2010 on, the U.S. would experience an extended period of unending “process of disinflation.” One could go on and on: the zillion times he has said the Euro would collapse or how negative interest would never ever happen. Regarding the Euro, he even went as far as to put in writing that many of the peripheral countries of Europe would be unable to remain in the Eurozone, even predicting that Greece would be out along with Spain and Italy four years ago.

I won’t just focus on Krugman, for every slap-stick comedy duo has a sidekick and partner and there is no better person I can slot for this role (casting couch aside) than the one and only Larry Summers. Summers, former Treasury Secretary during the Clinton administration and former Director of the National Economic Council for President Obama has blessed the world with the already disjointed and discredited concept of "secular stagnation." Now to provide a little background, when Barack Obama was elected in 2008, he mounted Summers as head of the National Economic Council. This even after he made remarks suggesting that women were biologically and genetically inferiorto men and more so, had not done such a great job while in the Clinton administration with respect to the dotcom bubble and his advocacy for the Commodity Futures Modernization Act of 2000. The CFMA gave us financial derivatives, credit-default swaps and other complex papers which were basically unregulated and brought about the 2008 financial collapse. Although prior to this he regarded these new changes regarding securitization on Wall Street as being positive.

But I digress, back to secular stagnation. Summers believes that the U.S. economy is engaged in a new long-time trend or new normal that he has termed "secular stagnation." In simple terms, he suggests that without the existence of bubbles in any part of the U.S. economy, it is mathematically impossible for the economy to generate enough spending to get to full employment. For him, this is because since interest rates can't go below zero (Krugmanesque) and because the "natural interest rate “has been permanently lowered into negative territory such that real rates can't go low enough to keep the economy out of a protracted slump.

This all sounds good on paper but there are more than a few things wrong with this vision of Summers. The foremost is how one calculates real rates. How do we measure real interest rates or are we measuring real interest rates? When cats like Summers say that inflation-adjusted rates have been falling, most are just subtracting expected inflation from the nominal interest rate. The concern is that the way I see it, real interest rate is entirely different from the natural interest rate, which mean a more tenable explanation other than secular stagnation and the new normal of sub two percentgrowth, could be due to an unusual prolonged business cycle.

My question is how can cats like Krugman and Summers keep getting away with being so wrong so frequently yet venerated as economic Gods by the elite east and west coast press outlets and even many of our current politicians? Until we figure this out, it will be nearly impossible to have intelligent reasoned and fact based discussions or even arguments with such individuals on the topic of economics. I understand completely what Robert Skidelsky meant when he wrote: “Today’s professional economists, by contrast, have studied almost nothing but economics. They don’t even read the classics of their own discipline. Economic history comes, if at all, from data sets. Philosophy, which could teach them about the limits of the economic method, is a closed book. Mathematics, demanding and seductive, has monopolized their mental horizons. The economists are the idiots savants of our time.”